If a tenant under a commercial lease breaches a contractual term in the lease, then the landlord has a contractual right to repossess the property by forfeiting the lease.
Forfeiture allows the landlord the right to terminate the lease and regain possession of the property should the tenant breach the terms of the lease.
When can a Landlord Forfeit a Lease?
A landlord can forfeit a lease when:
- The tenant has failed to comply with their obligations set out in the lease; or
- If there is an occurrence of specified events in the lease (for example, if the tenant has become insolvent).
The Landlord’s Right to Forfeiture
The landlord will need to ascertain their rights to a forfeiture as stated in the commercial lease, as forfeiting a lease needs to be in accordance to the forfeiture clause.
Generally, there will be a specific forfeiture clause in the lease, stating the grounds for when the landlord has the right to forfeit a lease. This clause should also outline how long the breach must have been occurred before the landlord has the right to forfeit. Usually, if there has been a breach of a contractual term in the lease for a period of 14 or 21 days, then the landlord will be entitled to forfeit the lease.
How can a Landlord Forfeit a Lease?
To enforce forfeiture of a lease, the landlord must follow statutory procedures. To commence forfeiture of a lease, the landlord must serve a Section 146 Notice to put the tenant on notice of the breaches of the lease, and to request the tenant to remedy the breach if possible. If the breach relates to non-payment of rent, the landlord would not need to serve a Section 146 Notice, providing that the landlord has made attempts to demand payment of rent.
Once a Section 146 Notice has been served to the tenant, and if the breach has still not been remedied within a reasonable time, then the landlord has the right to exercise a forfeiture of the lease.
There are two methods of forfeiture available to commercial landlords.
- ‘Peaceful re-entry’ of the property
- Court proceedings
A ‘peaceful re-entry’ of the property is where the landlord enters the property to change the locks to prevent the tenant access to the premises. Landlords should ensure that no one is present at the premises when changing the locks, as the landlord would fall foul of committing a criminal offence if there is someone present at the premises and objects to the change of locks.
The other route of forfeiting the lease is to issue court proceedings, where the lease will end once the proceedings have been served. However, this route can be a lengthy and timely process which can ultimately lead to significant cost in legal fees.
Relief for Tenants from Forfeiture
Even if the landlord is successful in forfeiting the lease and takes repossession of the premises, the tenant or a third party with an interest in a lease have the right to apply to the court for a relief from forfeiture.
The aim of the relief from forfeiture is to provide the option for both the landlord and tenant to be in the same position as they were before forfeiture once forfeiture has taken place.
To be eligible for the relief, the tenant will need to remedy any breaches, and also pay the landlord’s costs or compensate the landlord for the forfeiture process if ordered by the court.
When granting relief, the court will take into consideration factors such as the conduct of the tenant, and the nature and seriousness of the breach. In the event that the relief application is successful, the lease will be reinstated allowing the tenant to remain at the premises.
Waiving the Right to Forfeiture
When the landlord has the right to forfeit a lease, the landlord must act with care to not accidentally waive their right to forfeit a lease.
Waiving the right to forfeiture can occur when the landlord:
- Knows about the tenant’s breaches and does not act in a timely manner
- Commits an act as to construe that the lease continues to exist
- Communicates that act to the tenant
A landlord can unconsciously waive their right to forfeiture by acknowledging continuation of the lease by demanding and accepting rent, carrying out repairs and maintenance to the property, or even just simply talking to the tenant.
Type of Breaches
The landlord’s right to forfeit a lease would depend on the type of breach committed. A breach of a lease can be categorised into two different categories: continuing, and once and for all breaches.
Examples of a continuing breach includes:
- Breach of a user covenant
- Failing to keep a property in repair
- Breaking an insurance covenant
Examples of a once and for all breach includes:
- Failure to pay rent
- Failing to undertake repairs before a specific date
- Breaches in relation to assigning or subletting a lease without consent
If the tenant commits a continuing breach, the landlord has a new right to forfeiture each day whilst the breach continues. Therefore, if a landlord waives their right to forfeiture, they have a new right to forfeiture the next day.
If the tenant commits a ‘once and for all’ breach, the landlord only has one opportunity for a right to forfeiture. If the landlord unintentionally waives their right to forfeiture, the landlord will not have another right to forfeiture. If the breach relates to failure to pay rent, then if the landlord mistakenly waives their right for the rent previously due, they would have a new right when the next rent becomes overdue.
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